Correlation Between CHESS and SXP

Can any of the company-specific risk be diversified away by investing in both CHESS and SXP at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining CHESS and SXP into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between CHESS and SXP, you can compare the effects of market volatilities on CHESS and SXP and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in CHESS with a short position of SXP. Check out your portfolio center. Please also check ongoing floating volatility patterns of CHESS and SXP.

Diversification Opportunities for CHESS and SXP

0.64

Correlation Coefficient

CHESS  SXP

Poor diversification

The 3 months correlation between CHESS and SXP is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding CHESS and SXP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SXP and CHESS is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on CHESS are associated (or correlated) with SXP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SXP has no effect on the direction of CHESS i.e., CHESS and SXP go up and down completely randomly.

Pair Corralation between CHESS and SXP

Assuming the 90 days trading horizon CHESS is expected to generate 2.1 times less return on investment than SXP. But when comparing it to its historical volatility, CHESS is 1.44 times less risky than SXP. It trades about 0.12 of its potential returns per unit of risk. SXP is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  20.00  in SXP on September 3, 2024 and sell it today you would earn a total of  25.00  from holding SXP or generate 125.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

CHESS  vs.  SXP

CHESS

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in CHESS are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, CHESS exhibited solid returns over the last few months and may actually be approaching a breakup point.

SXP

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SXP are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, SXP exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CHESS and SXP

The main advantage of trading using opposite CHESS and SXP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CHESS position performs unexpectedly, SXP can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in SXP will offset losses from the drop in SXP's long position.

The idea behind CHESS and SXP pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.